Special State Report - December 2014 Revenue Forecast Summary

December, 2014 Indiana State Revenue Forecast Summary

By John Grew

Indiana University Office of State Relations

State revenue and economic forecasts are produced in December and April (prior to the beginning of a new biennium) and the following December after the biennium has begun. Thus, the December, 2014 forecast is the first in the cycle of biennial budget forecasts and is timed to provide the Governor and legislators with a projection of available funds for the upcoming biennium to guide development of the biennial budget beginning on July 1, 2015. A summary of both the revenue and the economic forecasts are presented below.

Revenue Forecast

Revenue collections for the first five months of the fiscal year were $85 million below target. Most of the shortfall was attributable to shortfalls in individual income tax and gaming revenues. Reflecting this tax collection performance, the FY 2015 forecast was decreased by $129 million from the amount projected in December, 2013. The forecast also provide first-time projections of revenues for each of the years of the upcoming biennium. Here are the amounts forecast for each of the fiscal years (in $ millions):

Actual Revised

FY 2014 FY 2015 FY 2016 FY 2017

Total Revenue $14,402 $14,730 $15,090 $15,572

Yr. over Yr. Change $328 $360 $482

Yr. over Yr. % Change 2.3% 2.4% 3.2%

Change from Dec. 2013 Forecast ($129)

Economic Forecast

An essential component of the state revenue projection process is an independent economic forecast. In addition to providing a general economic outlook, this forecast, prepared by Global Insight (GI), a private company, provides key economic data that are used in the equations that produce state tax revenue projections. During their presentation, Global Insight presented several key points:

Economic performance during the current economic recovery has lagged most periods of economic expansion for several reasons, including federal budget reductions, “consumer retrenchment” (higher federal taxes, debt repayment, and poor wage growth), a weak housing recovery, and suppressed business investment.

Consumer spending has driven most of the economic growth while business investment has been lagging. Lower gasoline prices should provide a boost to consumer spending.

Recent job growth has been skewed towards jobs earning lower wages.

Specifically regarding Indiana, strong auto sales has helped Indiana’s economy perform better than most of our neighboring states, although economic performance in the Midwest has lagged most other regions of the U.S.

Key economic variables for Indiana were forecast as follows:

2014 2015 2017

Total Employment Growth 1.8% 1.7% 1.3%

Unemployment Rate 5.8% 5.5% 5.7%

Personal Income Growth 2.1% 4.0% 4.5%

Real Gross State Product 1.9% 2.3% 2.2%

Conclusion

Indiana is continuing to recover from the Great Recession. Individual income tax collections have been particularly disappointing as personal income growth continues to be modest, despite significant reductions in unemployment. The forecast reflects an improvement in sales tax revenue, perhaps due to pent up demand for durable goods, including autos. Gaming revenues continued to decline due to increased competition from Illinois and the introduction of gaming in Ohio. Finally, tax cuts enacted in recent legislative sessions continue to be phased-in, reducing state revenue growth.